October 4, 2018

As most of you probably know by now, Elon Musk settled with the SEC. Though, perhaps it would be more accurate to say that the SEC settled with Elon Musk. The settlement over last weekend was apparently on the very same terms that he rejected at the end of the week. Uhm, who leaves a rejected offer on the table, especially when that offer was a gift because the case against Musk was extremely strong.

Apparently it is because Elon is deemed the Indispensable Man. SEC Chair Jay Clayton said that the settlement was best for Tesla shareholders. Musk supposedly threatened to quit as CEO unless the board backed him to the hilt. So apparently both caved to the legend of Elon.

The board’s action is somewhat expected–after all, they are Elon’s co-dependents and enablers. The SEC’s actions are rather more disappointing. My best explanation is that the SEC filed suit against Musk only because if they hadn’t they would have been a laughingstock given the outrageousness of Musk’s actions. Their heart wasn’t in it, however, and they were willing to capitulate rather than bear responsibility for Tesla’s fate. The fundamentals haven’t changed, and Tesla’s future is still fraught.

And Elon hasn’t changed either. Even a mild settlement spurred his narcissistic rage, which he expressed in a tweet scorning the SEC as the “Shortseller Enrichment Commission.” Still obsessed with shorts, still unable to handle any criticism, still unable to count his blessings.

This is the man whom the SEC apparently deems indispensable, and believes is the best guardian of Tesla shareholders’ interests.

Perhaps the judge who must approve the settlement will find the SEC’s arguments unpersuasive. She has asked for each side to file briefs defending the settlement. This briefing is pro forma, but in past years–in dealing with big banks and brokers like BofA and Merrill, anyways–judges have rejected SEC settlements. Perhaps that will happen here. Tesla stock sank today on the news of the judge’s request, and sank more post-close after Elon’s tweeter tantrum.

Even if the judge blesses the settlement, Tesla still faces its chronic cash flow issues. The settlement may make it somewhat easier to go to the capital market–although that would potentially–and should–trigger another investigation and perhaps suit given Elon’s adamant denials of the need to do so. But even with a settlement, recent events have no doubt made it harder–and costlier–for the firm to sell more stocks and bonds. Elon got off easy once. Given that he clearly hasn’t changed–and what 47 year olds do, really?–there is a serious risk that (a) he won’t get off so easy next time, and (b) there will be a next time. That will affect the receptiveness of the capital markets to Tesla’s voracious cash needs.

In sum, by the grace of the SEC, Nemesis has been stayed for now. But Hubris remains. Meaning that Nemesis may well return, more vengeful than before.

Interestingly, both Tesla’s third quarter results and the reality-based Bloomberg Model 3 Production Tracker suggest that a corner might have been turned at the factory. I’d like to see some forensic accounting analysis of the purported profits and positive cash flow, but it looks like the company is at least producing over 4000 units a month on a repeated basis.